Stock option pricing models

The option Greek Vega

Vega is one of the most important Greeks. It measures the relationship between the volatility of the underlying stock price and the option price.

Less volatile stocks result in options that have a lower Vega. More volatile stocks produce options that have a higher Vega.

When you are long (own) options, you are said to be long Vega and short theta. This is because any sharp increase in the underlying stock price can spike implied volatility levels. This can only help your long option position.

On the flip-side, if you are short options, in the case of a short put or a short call. A sudden spike in implied volatility can hurt your short option position.

When you are short options, you are considered long Theta and short Vega. This is because you want time to pass and the option premium to lose value, so you make money.

Many traders and investors sell options for this very reason. No one can guarantee a sudden rise or fall in the underlying stock. But, as sure as the day is long, time will pass and option premium will errode.

Trading volatility is a very popular option strategy if implemented with care.

There are many ways that traders try to capitalize off of a sharp rise in volatility. Take earnings for example. If you expect a sharp move, but don't know which way the underlying stock will go. Some traders will get long volatility in the Puts and the Calls. Such a position is also known as a straddle or a strangle depending on which strike prices are used.

As you can see, options provide opportunities not always available when simply buying or selling stocks. There are so many advantages to learning about stock options. We have not even scratched the surface yet.

For now, just understand that Vega is one of the option sensitivities regarding the relationship between the option contract and the underlying stocks volatility.

Vega is one of the option Greeks, that help traders and investors understand the price of the option contract in relation to the underlying stock.

Mater the Greeks, as well as option pricing and you will be one step closer to conquering the market.